Brazil May Economic Activity Falls Less Than Economists Forecast

Brazil’s May economic activity declined less than economists expected, as the central bank keeps rates on hold to avoid damaging demand.

The seasonally adjusted economic index, a proxy for gross domestic product, fell 0.18 percent in May from the prior month after growing a revised 0.05 percent in April, the central bank said today in a report posted on its website. The drop was the biggest since December, when activity fell 1.37 percent. The median estimate of 31 economists surveyed by Bloomberg was for a 0.40 percent decline.

President Dilma Rousseff’s administration has tried to combat the highest inflation in a year without exacerbating a slowdown in economic growth. Officials this year have announced tax cuts and higher spending, and the central bank yesterday kept the key rate unchanged after having lifted borrowing costs 375 basis points in the year through April. Economists forecast government efforts will fail, as they have cut their 2014 growth estimate to the lowest ever.

The non-seasonally adjusted economic activity index fell 0.17 percent from a year ago, compared with a median estimate of a 0.32 percent drop, the central bank report said.

The bank yesterday decided to keep the key rate on hold at 11 percent for the second straight meeting, saying the decision was made “at this moment.”

Annual Inflation

While annual inflation in June reached 6.52 percent, the highest level in a year, monthly consumer price increases slowed to 0.40 percent. The central bank targets annual inflation at 4.5 percent, plus or minus two percentage points.

Brazil’s government this year said it would increase social spending, make permanent payroll tax cuts in 56 industries and lure billions of dollars in infrastructure investments to spur growth. Finance Minister Guido Mantega said as recently as last month that economic growth will gather momentum in upcoming quarters.

There are signs economic expansion has been uneven. While retail sales in May unexpectedly grew, industrial output in the same month contracted on a drop in capital goods production.

Latin America’s largest economy grew by 0.2 percent during the first quarter, as a contraction in family consumption and investments offset a rise in agriculture. Brazil grew by 0.4 percent during the last three months of 2013.

Economists in a July 11 central bank survey cut their 2014 growth expectations to 1.05 percent, the lowest on record. That compares to the central bank’s own estimate of a 1.6 percent expansion this year.

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